After improving in the last four years, the state finances could be affected in the current fiscal and may start deteriorating from next financial year, because of higher expenditure, low revenue growth and populist measures due to elections, rating agency Crisil said.
The rating agency expects that key fiscal indicators of state governments -- revenue deficit and gross fiscal deficit - may deteriorate from 2009 though the impact will begin to be felt in the current fiscal.
"The growth in state governments' own tax revenues, as well as in devolution of taxes from the centre, is expected to slowdown," the rating agency said in a release.It further said that the adverse effect of lower revenue growth will be aggravated due to higher development and non-development expenditures.
The deterioration in fiscal indicators would adversely impact the states' debt protection measures and overall credit risk profiles.
The general and states election will also create pressure to increase populist expenditure, subsidies, and tax waivers and concessions, it added.
"A shortfall of even four per cent in aggregate budgeted revenues for 2008-09 can wipe out the state governments' entire revenue surplus and push them back into revenue deficits," the release said.
Many states will borrow beyond the Fiscal Responsibility and Budget Management Act targets, resulting in higher debt levels, it added.
It said the revenue from VAT, contributing 42 per cent of tax receipts, is expected to slowdown because of slower economic growth and deceleration in consumption demand.
The slower growth in the centre's income tax and excise duty collection will also affect the devolution of central taxes.